AAFES’ Miracle

By Deena Amato-mccoy

Brigadier General Keith Lee Thurgood, Commander, Army and Air Force Exchange Service (AAFES), remembers the “Miracle on Ice,” on Feb. 22, 1980, when the U.S. hockey team beat the Russians during the Winter Olympics, held in Lake Placid, N.Y. That’s why he was so pleased when the AAFES had its own “miracle” on Feb. 22, 2008.

“That was when we completed the replacement of our legacy-based merchandising system onto one platform—our largest project ever,” he told Retail Technology Quarterly.

Dallas-based AAFES runs more than 3,100 facilities, including post exchanges (PXs) and base exchanges (BXs) in 30 countries—including Iraq. The outlets, which range from tents to shopping centers, provide general merchandise and consumables, including groceries, to active-duty military personnel, reservists, retirees and their families. AAFES, which receives less than 5% of its funding from the Department of Defense, is a $10 billion retailer.

“Our top competitors are any company that operates outside of our gates,” quipped the commander. “That includes Wal-Mart, Target, Kohl’s, J.C. Penney and any other retailer that offers services similar to ours.”

There are a few factors that set AAFES apart from competitors, however. First, it sells merchandise at approximately 20% less than traditional retailers. AAFES also doesn’t charge sales tax.

But the biggest difference is its global reach. “Our motto is, ‘We go where you go,’” he said. “When our nation calls the troops overseas, whether it is in Baghdad, Bosnia or Kosovo, we establish locations,” Thurgood said. “Whether we are operating a location in Iraq or Fort Worth, Texas, our overall retailing business processes remain exactly the same.”

Like its traditional retail competitors, AAFES also needs to ensure it gets the right merchandise to the right location at the right time—regardless of where the store is based. So it is not surprising that the retailer was eager to create a global supply chain that operates as efficiently as possible.

However, a few factors hindered AAFES’ efforts over the years. “Our goal is to give value to our soldiers and their families,” said Thurgood.

“But unlike the 1960s and 1970s when our soldiers and their families lived on the post, today many soldiers and their families are not on base,” he said. “We still need to establish a value proposition where we are considered a shopping destination. That means we are always looking at ways to improve our value pricing and marketing strategy to stay competitive.”

However, the supply chain technology that AAFES had been relying on “was not fitting into today’s complex supply chain,” said Dale Linebarger, the retailer’s information technology (IT) senior VP, CIO.

As recently as four years ago, the company relied on multiple methods to replenish its stores. “Some were automated, others were based on orders that were manually created by buyers, and others still were created by the stores themselves,” he explained.

“It was a fragmented process that had little to no ownership,” Linebarger said. “Not only didn’t we know who was responsible for replenishment, but the processes were not efficient. We didn’t have insight into merchandise and we weren’t able to support lower, less-expensive on-hand inventories.”

These fragmented processes were supported by equally disparate systems. “We knew this [running legacy-based logistics systems] would never help us support a multichannel operation in the future,” Thurgood added. “We looked at our operations four years ago, and knew it was time to make a change.”

AAFES was not about to rush into making that change. First, the retailer established its vision and goals. “To keep up a reputation of being a good retailer and marketer, we knew we wanted to create an agile, flexible and responsive supply chain that would help us satisfy our customers’ needs,” explained Thurgood. “Our team realized that this required us to make changes and therefore, implement technology.”

However, AAFES did not put technology at the forefront of the project. “Most people think technology is the answer. For us, we consider technology a piece of the bigger solution,” he said.

“We quickly realized that the bigger solution to our vision was to focus on how we could use technology applications to improve our business processes and positively impact our organizational transformation,” he revealed.

By approaching the project from this direction, “We knew we were in a better position to get the right drive supply chain efficiencies that we hadn’t seen in the past,” he said.

“This included increasing cycle time and velocity, which would support our supply chain responsiveness, flexibility and speed to market,” he added.

Next, AAFES determined the business processes it planned to tackle. The retailer’s first task was to replace its legacy system with a new platform. Once the platform was in place, the retailer wanted to create a new merchandising strategy.

With a plan in place, AAFES was ready to search for a technology solution to fulfill its vision. Again, the retailer established a plan of attack to make sure it could reach its goals.

“We knew we wanted a centralized view of inventory,” Linebarger said.

AAFES also wanted an integrated suite of products. “This way, we didn’t have to do extra work to integrate components into our aging legacy system, and we also didn’t have to worry that disparate best-of-breed applications weren’t compatible,” he said.

The retailer finally chose the Oracle Retail platform to support its long-term strategy.

Making It All It Can Be

Realizing that this project would be a multi-year undertaking, AAFES began implementing the key elements in waves. The first wave concentrated on implementing the foundation and the actual Oracle Retail platform.

This was no easy undertaking. “We had to take 40 years worth of merchandise data out of our legacy systems and prepare it for the new RMS [retail merchandising system]. This data consisted of item and supplier data, as well as pricing information,” Schweitzer explained. “This process required a lot of data cleansing, and item reviews with our manufacturer partners. These efforts were required if we were going to successfully embark on the project’s next phases.”

It took two weeks for AAFES to load the new system with the cleansed, updated information.

With RMS up and running by July 2005, AAFES launched into the second wave: preparing to launch the platform’s sales auditing and forecasting systems. The sales auditing system enables the retailer to review any sales discrepancies and feed sales information into the data warehouse. The forecasting system uses time series forecasting algorithms and state-of-the-art modeling techniques to create accurate forecasts with little human intervention.

“We were able to use the packaged solution without any modifications,” Schweitzer said. “This enabled us to make the upgrade with less pain.”

These projects all went live in April 2006. Next, the retailer added a new purchase-order system, deals management and direct-store delivery in November 2006.

With all of the pieces in place, AAFES was ready to utilize an advanced inventory-planning model. “This allows us to view all inventory transfers between our 11 distribution centers,” she explained. “By tying in data stored in our data warehouse, we are able to reduce transportation costs and reduce inventory through automatic processes that generate DC-to-DC transfers.”

Advanced inventory planning went live in April 2007, followed by the launch of the pricing system in July.

Following tests of all pieces to ensure they worked together and optimized merchandise allocations and inventories, “We went truly live with our centralized merchandising processes on Feb. 22, 2008,” she said.

“It was ironic that this milestone happened on Feb. 22—the same date that the U.S. hockey team defeated the Russians during the Lake Placid Olympics almost 30 years ago,” Thurgood recalled.

“This project was such a journey and investment that many thought it would be impossible to complete—similar to how many thought the United States could not beat the Russian hockey team. That was the ‘Miracle on Ice.’ We call this, the largest project we have ever tackled, the ‘Second Miracle.’”

With all of AAFES’ stringent planning and testing, it is no miracle that the platform is helping the retailer achieve its goals. “All of our merchandising functions are linked in one place and they all work together,” Schweitzer said. “We quickly saw a significant reduction in our inventory levels, and our service levels have increased.”

In addition, AAFES anticipates an 18% return over its initial investment within the next few years, Thurgood reported.

With three solid months of performance under its belt, “We have gained visibility in to our inventory,” he said.

“The platform is helping us to reduce our inventory where it makes sense, as well as improve our in-stock percentages and inventory turns,” he revealed. “Over time, these factors will impact our revenues and bottom line margins.”

RMS is clearly filling its role as “the heartbeat of the organization,” as Thurgood described the core merchandising system. “Our merchandising platform will be powerful as we leverage and add business processes.”

That said, AAFES has wasted no time embarking on its next marching orders—managing 40 new IT projects. And many will impact the supply chain and stem from its new platform.

The most pressing supply chain project on tap is the implementation of a new warehouse management system (WMS). A new WMS will replace current warehousing systems with the latest and best practices. This will help AAFES manage movement through its DCs.

“It is just another tool that will help us to drive efficiency across our supply chain and make a fundamental difference for our customers,” Thurgood said.